Turkey: General Abuse Prevention Provision: Practice In Turkish Tax Law

I. Introduction

Like many other countries within the Civil Law tradition, there
is a provision in Turkish tax law which acts as a general abuse
prevention provision. The "primacy of substance over
form" principle, which was introduced to Turkish substantive
law in 1980 with an amendment made to Article 3 of the Tax
Procedure Law, is expressed as "The basis of taxation is the
taxable event and the actual nature of the transactions related to
the event". According to the preamble of the Article, the
basis of the amendment is Article 1 of the German Tax Procedure
Law. On the other hand, the principle was being implemented in
Council of State decisions and found in some legislation, without
being patently mentioned, even before the said provision was
introduced; e.g. the provisions regarding hidden income and hidden
capital in Article 15 of the VAT Law No. 5420, and the provision
stipulating that taxation must be based on the actual nature of the
documents set forth in Article 4 of the Stamp Duty Law.

II. Debates regarding the scope

As it has been in other countries, the relevant provision has
been controversial among Turkish tax practitioners and academics
during its 30 years of history. The crux of the debate can be said
to be formed by two axes. The first axis of the debate is concerned
with whether the economic approach is a proof rule or a
qualification rule; the second axis discusses the characteristics
of the provision and its scope and place for implementation.
Regarding the former debate, while most commentators approach the
subject under the title of "interpretation and proof",
there are authors who consider the issue as a qualification
problem.

Regarding the second debate, according to some jurists, the
provision bears the characteristics of a general abuse prevention
provision, while some other jurists maintain that the provision,
apart from displaying such characteristics, is a reflection of the
civil law prohibition of abuse of rights. Nevertheless, there is
consensus amongst commentators on the principle that the provision
should not be used arbitrarily and in a manner inconsistent with
the rule of law.

III. Practice of the tax administration

In current practice, the tax administration uses Article 3 of
the Tax Procedure Law in order to justify actions like disregarding
companies founded in free trade zones, rejecting tax exemptions
regarding income generated from sale of participation shares and
real estate, making VAT assessments claiming that a service which
is non-existent is actually rendered, wholesale rejection of all
transactions made with related parties, etc. The
administration's approach is founded on two important concepts
of civil law, namely simulation and tax-veiling.

In order to properly understand the theoretical basis of
simulation and tax-veiling, these concepts must be handled
carefully along the lines of the provision in Article 3 of the Tax
Procedure Law. The said provision, in essence, theoretically
addresses both tax dodging, i.e. tax-veiling actions (indirect
cheating), and tax/financial simulation (direct cheating). In
tax-veiling, the economic result is left out of the scope of
taxation through a different legal appellation; the law is sought
to be circumvented in this way, with a solely tax-related motive.
Therefore, the elements of the act resulting in tax-veiling may be
set forth as an economic result, legal form, abuse of legal form
and will to abuse legal form. If the utilization of a legal form
can be said to be artificial, irregular, contrary to the ordinary
progression of affairs, discordant, complex, confusing, or
illogical, then a finding of abuse can be made.

In tax-veiling, the form of the actual event is altered with
intent to circumvent tax, although the result of the actual event
is not changed. There never are two separate acts (in the form of
apparent act and covert act) in tax-veiling; the apparent legal
form is desired by the parties, it is valid in civil law, but it
does not correspond with the economic context of the actual event.
Therefore, in terms of "actuality" stipulated in Article
3B of the Tax Procedure Law, in tax-veiling the "legal
actuality" (legal form) does not correspond to the
"economic actuality" (economic context).

On the other hand, in tax/financial simulation, there are two
acts, namely the apparent act and the actual act. The covert act,
which is hidden under the apparent act, is the act of which the
parties desire the economic results, and this act is directly
subject to tax according to the tax laws. In tax simulation, the
act which the taxpayers do not want to perform but perform
nonetheless as cover is invalid, while the actual act which the
taxpayers desire to perform and perform according to the conditions
of validity is valid. Therefore, in terms of "actuality"
stipulated in Article 3B of the Tax Procedure Law, simulation of
the "legal appearance" does not correspond to the
"legal actuality".

IV. Conclusion

"The primacy of matter against form principle", whose
theoretical foundations and development in Turkish Law has been
briefly touched upon above, is an important tax law principle which
is controversial still and will be so in the future. We would like
to point out that it is essential in the practice of this principle
(whether or not the absence of the principle would cause a problem
should also be debated), that the rule of law be respected, that
the constitutional principles regarding taxation be not violated
(especially the legality rule), and the issue be addressed within
the practice of wilful conformity with tax and democratic
governance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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